MacroScope

Fed taxonomy: Lacker is a hawk, not a bull

Not to mix too many animal metaphors but, generally speaking, monetary policy hawks also tend to bulls on the economy. That is, they are leery of keeping interest rates too low for too long because they believe growth prospects are stronger than economists foresee, and therefore could lead to higher inflation.

That is not the case, however, for Richmond Fed President Jeffrey Lacker, a vocal opponent of the central bank’s unconventional bond-buying stimulus program, particular the part of it that focuses on mortgages. He reiterated his concerns last week, saying the Fed should begin tapering in September by cutting out its mortgage bond buying altogether.

But when I asked him whether upward revisions to second quarter gross domestic product reinforced his case, Lacker was surprisingly skeptical of forecasts for a stronger performance in the second half of the year.

You look through the last couple of quarters and the last couple of years back to 2009 – we’re getting 2 percent growth on average. The kind of noteworthy thing is the softness in disposable income. The savings rate’s going down. People who have been projecting an acceleration of growth had been thinking that the decline in the savings rate was going to do it. But this is steady consumption growth, and a decline in disposable income growth. So I just don’t see where an acceleration of growth is going to come from. I think growth is likely to average about 2 percent going forward.

That puts him well below the median ‘central tendency’ forecasts published quarterly by policymakers, which as of June projected growth between 3 percent and 3.5-percent for next year.

Hints of recession in sleepy Richmond Fed data

It’s a report that gets little attention normally (We at Reuters geek out on Fed data a lot, and even we don’t write a story about it). But an unusually sharp contraction in the Richmond Fed’s services sector index for July caught the eye of some economists. The measure took a nosedive, falling to -11 this month, the lowest in over two years, from +11 in June.

Tom Porcelli at RBC says the plunge in new orders was downright scary:

Richmond Fed manufacturing got absolutely walloped in July. In fact, the all-important new orders component sank to an abysmal -25 from -7 in June and -1 two months ago. This is by far the weakest print since the recession. In fact, at no point has this metric been this low when we have not been in a recession.

To be sure, the data capture only two cycles prior to this one, but this doesn’t take away from the fact that the recent print is suggesting things could be much worse than advertised. We continue to hear how this year is “2011 all over again”, yet the data suggest it is materially worse.

Interview: Richmond Fed’s Lacker on Libor, ‘soggy’ growth and the limits of monetary policy

There appears to have been a significant slowdown in the second quarter. In particular we saw the pace of job creation slowed to a pace of 75,000 per month in the second quarter down from 226,000 in the first quarter and there are also concerns about slowing growth globally, beyond Europe but also in the emerging world and China, which was highlighted in the minutes (to the June meeting) this week. So, where do you think we’re headed? Are we just going to remain in a soft kind of pace? Are there upside risks to growth? Are there downside risks to growth?

Growth has definitely softened. The data are unmistakably weaker in the second quarter than we had hoped they would be. I think everyone recognized the first quarter and the end of last year were a little bit stronger than we might be able to sustain in the middle of the year but it’s definitely come in softer than I’d expected.

At the beginning of the year, it seemed as if Europe wouldn’t maybe weaken as much as we thought but lately the weakening from Europe has been coming online. In the U.S., I think we’re in a situation where we’re going to fluctuate from between the level where we are now to a level that’s more like we saw six or eight months ago. We’re going to have soggy patches, we’re going to have stronger spurts. If you look back over the last three years that’s the record you see. I don’t see a reason for that to change markedly.